I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Friday, November 20, 2009

2012: Dollar At The End Of The World

I am a devoted and frequently bemused student of aberrant market behaviour as expressed in the popular media, i.e. "lifestyle" TV programs, films, radio, magazines, etc. I'm always on the lookout for such market signals emanating from unlikely, non-professional sources because I see them as excellent signs of excess. In other words, I'm an inveterate watcher of unusual bubble clues.

A few days ago I saw 2012, the latest "end of the world" movie. Apart from the spectacular end-of-days visions (California slipping into the Pacific, mile-high tsunamis crashing on Mt. Everest), what really caught my attention was the mention of the dollar's low value against the euro; I believe it was highlighted three times. (Oh well.. my obsession with all things monetary is obviously well beyond redemption.)

An Unusual Clue For The Dollar?

The one I remember best is when an Arab sheik is asked to pay "a billion" per person to be saved; he responds that "he has a big family" and that "a billion dollars is a lot of money" - only to be told that the price is "a billion euro".

There are two possible interpretations :

a) The dollar's demise is now irreversible and will proceed as a natural catastrophe.

or,

b) The dollar's drop has gone so far that it permeates even the most popular global mass media. Therefore, it has nowhere else to go but up.

Being mostly a contrarian I favor choice (b), but not yet with any real conviction, i.e. I have not put my money where my bemused observations logically lead me.

However, I am also increasingly vigilant for other, more fundamental signs of trouble brewing in euroland, where several peripheral economies are in real danger of falling apart under the triple stress of a weak uncompetitive economy, huge debts and an overvalued currency.

49 comments:

Looking at the forces in the economy and the effect of these forces over time: One major influence is government stimulus/bailout money.

And you have two parties, the inconsistent Know Nothing Party, and the cowardly Do Nothing Party.

In 6 months+/-, these forces will be battling about how to react to further contraction caused by debt destruction. See it was fine for Dumbya and the boyz to fork over $700 Billion, but Obama will get squeezed.

The Know Nothings will think a double dip recession will fit right into their campaign strategy. A pissed electorate brings winds of change.

LOL."Find out the truth"LOLAbout 15 years ago I read Denis Duclos's great book called "Le complexe du loup-garou, la fascination de la violence dans la culture américaine". (Translation : the werewolf complex, the fascination of violence in american culture).A little push for Duclos : "why are there so many serial killers in the U.S. ? Why is the popular culture so steeped in violence and cruelty ? Is it true that violence on film breeds violence in the streets/home ? Why the fascination for the double figure of Jekyll/Hyde, man and beast in the same body ?... Duclos shows that screen violence is the reflection of a peculiarly American belief : society is nothing more than a precarious barrier against the animal in us waiting to pounce. The characters are repeats of the Nordic "berserkr", mad warriors always tempted to metamorphosize to massacre their own families. In their madness, they are the negative image of... democracy."Duclos is a great read, and a great intellectual. My gift to... Hell, and Bozo, who CAN read him, as I think he has NOT been translated.

I mean the countries that have adopted the euro as a currency, i.e. the particular subset of the EU.

But, I should hasten to add, that the EU itself is mostly a customs union with a currency attached to it for some of its countries and NOT a politically/culturally/nationally unified whole. This fact has VERY wide-ranging consequences (briefly, the EU is a strategic midget) - but the scope of this comment section is too limited.

Maybe not Latvia - too much publicity already, Estonia, Chekia, maybe, but I think Ukraine; there are so many weird rumors about Ukraine right now but nothing in the media - despite huge Danish investments in the country (mainly agriculture).

Then there is the never-reported fact that Denmark has secured credit lines and other "goodies" to the amount of Four Times the GDP, EUR 593.9 Billion, an amount ONLY surpassed by England.

What the f*cking h*ll? Did WE lend *all* the money to Iceland?? So far the biggest official bankruptcy was Roskilde Bank, costing at most 2% of that amount. Why is this vast amount required (One would assume that it costs real money to have guaranteed access to EUR 600 Billion - even if one does not borrow it)??

http://www.bloomberg.com/apps/news?pid=20601109&sid=aI.TvvSBYXBM

I think Ukraine will blow, taking a large Danish bank with it. Agriculture is extremely over-leveraged here.

At home (Portugal in my case), today the topic is the govt request to go for a yearly deficit of 9.2% (main news on newspapers). At the end of 2008 the public debt was probably around 65% of the GDP. People are trying to understand why the deficit increase. The main cause if of course less tax receipts. But the secondary causes are strange: govt talks about H1N1 preparations and reinforcing the provision for pensionss. The opposition asks for the real size of a bank bailout of a single small investment bank mainly used by people with lots of influence (we are talking 3000 clients - really small). All big banks are supposed to be "OK".

My larger point here is that financial information in Europe is much less transparent than in the US. So the big banks are "OK". Actually nobody really knows their real state. I would imagine that this scenario applies to many countries in the EU, but I think we might see how "OK" they are.

Note that quite a few countries in Europe have provided guarantees for recent borrowing of money from national banks. Sizable guarantees. This is not counted as "deficit" (this is not counted at all).

For example, Greece (the worst of the lot) has a 2009 deficit of 12-13% of GDP and a public debt that will end up around 120% of GDP this year and 130-135% next year. Plus private debt of 100% of GDP. Ouch.

4. (extension of 2) The public-debt status quo is changing rather rapidly. Some unsuspecting countries are increasing the debt

5. Germany (Germany?) seems to be thinking in going on the route of less taxes (FDP), hide new deficits

6. There is some myth and ideology in PIGS. Look at comparable public deficits, mainly being sold by UK people (Ambrose Evans-Pritchard). I am not defending PIGS, just noticing that France, Belgium, Germany seem to be on the same league, at least for public debt.

7. For me the worst offender is probably the fact that banks in Europe are very opaque and very bad surprises might show up (who knows?).

The real problem in the EU is the Maastricht Treaty. It doesn't even work in good times - given huge unemployment / underemployment numbers. Countries tied themselves to fiscal conservatism, without the foggiest notion of what to do in a recession, let alone a depression. Selective memory, anyone?

Good assessment of European cultural identity in my book. The EU is essentially a construct designed to compete economically with the U.S. on American terms. The Europeans are more interested in copying the U.S.'s perceived economic success than in trying to take a leading role. At least, this is the impression I get from France.But... France and the U.S. have a special relationship which is the result of the fact that the U.S. is the ultimate Enlightenment experiment, and the Enlightenment is of French origin. I have said this before, and I still believe it. Lots of passion involved in that...As for our global financial situation, it is just that. Global. No reason to believe that the Euro is going to survive the meltdown of fiat any better than the dollar will.Globalization is... globalization. And a global crisis in fiat will hit fiat hard EVERYWHERE, in my opinion.

I think the formal 3% deficit limit of the EU is a _good_ thing in good times (though I would agree with your general assessment).

The main problem is the ideological barrier with raising taxes on the too wealthy to cover deficit spending (which is possible even in the EU, most countries are still well below Scandinavian tax levels).

The only acceptable ideological solution is cutting spending. Raising taxes is forbidden. And it is mainly an elite thing. The average European is much less against taxation than the average American, me thinks. And I think the average European understands the difference between taxing the rich and taxing others.

Debra: You are correct about what is the EU.

Anyway, the problem is too much globalization. We are in this together, and that is BAD. a more autonomous world is a more resilient world.

While there are threads of this view I can certainly concur with, I also suspect that European disease which led to Bosnia and a few other sins stills seem alive and kicking...

Indeed it suggests flipper is probably fucked.

I suspect there are a few of us readers who would MIGHT differ to some degree (it depends what you mean) but in the interest of cooperation we will let these comments go with only a small protest.

Globalization is the consequence of the sins of our grandparents and you and I can never put that genie in the bottle no matter how much we might wish to game the system to our own advantage otherwise.

We all just have to compete until we all cooperate just like everyone else on this planet.

So many economic and financial Krakatoas to blow, and so little time. The beastly Black Swan can be heard flapping its fearsome wings in the distance, threatening to rain down copious amounts of ca ca upon mankind like so many avian Kamikaze.

And now those nightmare makers in Hollywood, those literalizers of metaphor and allegory want to take away even a glimmer of hope by portraying even the Himalayas as insufficient high ground. When mountains and mountains of money are reduced to the equivalent of jello in a pick axe fight, what's a poor pilgrim to do?

Love that prose, Edwardo, you've done it again...What's going on in France is really interesting in my book.France has maintained a strong central government emanating from Paris since... Philippe le Bel started putting it together. And the Revolution didn't change that very much either.What DID change is was a rather current measure (some 15 years ago at most) to accelerate what we call decentralization. Giving the regions and the provinces more autonomy (based on the rather silly and stupid monomania of the national government to... reduce spending reduce spending reduce spending (you know that mindless little mania that permeates all government think at this time on the planet).Well... a government which is going to reduce its... national spending while foisting off the financing of public service on the regions is a government that is ultimately going to reduce its.... power and importance... Can't have them advantages without them thar disadvantages, can you ?So... now the NATIONAL government has decided to ax the tax that employers pay to work (you guys still have that cute little taxation in the States, I know, it is colossally UNFAIR but then I suppose that, when you get right down to it, EVERYBODY ultimately thinks that taxation is unfair at bottom level...). And... that money is a MAJOR source of revenue for the regions which are increasingly assuming the financial burden for infrastructure, etc.This could be really interesting, this... conflict of interest...

As an FX analyst in the city I agree with you. Dollar sentiment is near an all time low. Typically these times turn out to be turning points for the USD. In any case if we have another credit contractionary phase there will be a return to a demand for USD. Just people stopping out of their short USD positions will be enough to force the USD substantially higher. Depending on the depth of your pockets I would argue that this is a great place to get small dollar long positions in place.

"Typically these times turn out to be turning points for the USD".Typically ? Since... WHEN ?Since the U.S. has been empire in the world.But... the U.S. is NO LONGER empire in the world. The U.S. is declining as fast as that water is rising around the Himalyas in the cute little preview Hell showed us in his post.Thanks for the black hole stuff, Thai.But I must say...When you think about the fact that Texas had/has panels to determine the future dangerousness of any single death penalty convict, and that our world leaders are giving the go ahead on chiantific experiments that nobody has a clue about... it is all rather... contradictory, isn't it ???

Well, in certain European countries the tax trend is quite the contrary at the moment - taxation to the hilt, and paying no mind to the en masse emigration (some of them will never come back).

As for the larger picture, we here seem to agree that the dam is compromised and / or the reactor leaking in many places, even if some talking heads out there claim 'worst part of recession is over' etc, funny. G. Celente (or was it somebody else?) said that we are now in that weird half second between first demolition charges going off and the structure collapsing into a pile of rubble. What makes it more likely is people getting more educated and involved, no longer willing to accept lies and halftruths for answers.

When the president of the EU council (.BE) and and foreign policy chief (.UK) were chosen (note "chosen", not elected), Sarkozy said something of the likes: "one is from an important country the other from a medium one". We these kinds of attitudes and words, one can imagine where the EU might end if push comes to shove (though French arrogance, exposed in the expression above, is despised all over Western Europe, as far as I can see).

Anyway, and this is to Hell: From your wording I would bet that you a reading too much of Ambrose Evans-Pritchard (AEP). While he is a worthwhile read, note that he has a big axe to grind (and his boss - the Telegraph is strongly Europhobic). Be sure that you get your info from other sources also.

Anyway, currently Greece is known to be funding itself on very short bonds (AEP raised this issue again) and that might backfire en masse. But, if the ECB is indirectly paying this, then maybe they are safe on that front, who knows?

France and the U.S. have a special relationship which is the result of the fact that the U.S. is the ultimate Enlightenment experiment, and the Enlightenment is of French origin. I have said this before, and I still believe it.

With regard to experiments aiming in the general direction of Enlightenment, no doubt Gandhi was thinking of that in particular when he was asked for his view of Western civilization, and replied, "I think it would be a good idea."

As Irving Berlin put it in his song, may the Creative Forces of the Universe stand beside us, and guide us, through the Night with the Light from Above (metaphorically speaking).

The word verification for this comment is "scure", which seems appropriate, as I feel I need to illuminate my previous overly gnomic remark.

Although I haven't been reading the comments here, and am in a sense making a snap judgment, it seems clear to me that Debra is an informed, thoughtful, and intelligent commenter. In choosing to focus attention on her assertion about the "Enlightenment" tie between France and the US, I might have said that I suspect that this is a much stronger feeling among French intellectuals and opinion leaders than it is in the American commentariat/power elite/MICFiC*, and while l'homme dans la rue has at least heard of it [the Enlightenment] in school, his American counterpart has not.

The situation in which we find ourselves makes it clear how far we are from implementing the values of the Age of Enlightenment. Not all manifestations of this quest have disappeared, of course. I would argue that the public-minded search for liberty, equality, and siblinghood on blog comment threads - which we ourselves are participating in, even as we speak [or exchange written information asynchronously, to be literal about it] - would qualify as an attempt to throw the Light of Reason on our predicament.

On the other hand, we have the skillful development of propaganda/advertising/public relations/repressive desublimation (in Marcuse's phrase), along with the truly frightening perfection of the technology of detection and destruction. Only the recalcitrant nature of the various subject populations across the globe - their stubborn refusal to do what they are told, even in the face of bribes and deadly force - stands in the way of the final victory of the Machine. It is not the values of the Enlightenment that our little brown brothers cling to, however - rather, it is Pashtunwali or the local equivalent. May the Force be with them.

Speaking of movies as the literalizers of metaphor and allegory, I see It's a Wonderful Life as a prophetic vision of what has happened to the American spirit in the time since that movie was made. We are now in Pottersville, not Bedford Falls. A change of heart by George Bailey is not going to get us back to where we liked to think we were. Will there be a mass uprising, analogous to the spontaneous eruption of the people's justice which is imagined in the "final scene" at http://tinyurl.com/25yzc7 ?

Maybe Mike Huckabee will be the guy leading the torch-carrying crowd. Who knows if it's good or bad?

And by the way Hell, I asked once before and you never replied one way or the other, but as you have finally admitted the truth- e.g. your "obsession with all things monetary is obviously well beyond redemption", and am posting on 2012, Ill ask again in case you have learned anything more since then:

Do you know if there is there a historical correlation between end of the year theologies and credit cycles?

I am reading on anti-peak oil blogs now they so a strong historical association with the obsession over energy supplies running out and credit cycles.

Currently the USD is the basis for the ever popular carry trade. If you believe that the global recession is over then the USD will continue to plummet until a challenger arrives...all in due time with fiat currency.

No, I don't think there is a correlation other than the obvious one, i.e. when the economy sucks and people feel low they can become hooked by cooky theories in order to "explain", deflect or dull their pain.

That is not to say peak oil is such a theory - it is fact. But PEAK OIL in screaming capitals can be used (and was so used) by any number of hucksters to peddle their wares.

I'm afraid I'm going to have to take exception to your tag line: "A SUSTAINABLE ECONOMY IS NOT POSSIBLE WITH UNSUSTAINABLE DEBT" if you imply that the US has issued too many treasury securities, which by the way is not borrowing for a sovereign issuer of it's own currency.

Our Federal deficits have not been high enough to sustain output and employment and this has led to our under-performing economy.

The Federal govt is the monopoly issuer of our money and they have not been issuing enough.

I would invite you to read this paper at another blog that I read and comment on for perhaps a better perspective on the current situation.

H, Thanks,Output wont increase until demand increases. ie Power Cos wont generate unless they think they have customer demand,etc..It really doesnt matter what "money supply" does, the last 12 mos should serve as proof enough as these so called "money supply" amounts have gone straight up and output has collapsed and employent cratered.

The govt is restricting demand by overtaxing and thereby running too small a fiscal deficit for the present circumstances, and has been doing so for years.

We need a MAJOR tax cut/tax holiday to restore aggregate demand in the economy. Sadly it looks like the Obama Admin is starting to turn the other way.

Also I would reiterate that the US issuing treasury securities is not a financing operation per se, the funds to buy the treasuries come from the deficit spending itself. Remember a sovereign issuer of a free floating non-convertable currency is never revenue constrained. The Treasury has traditionally sold the bonds to remove reserves from the banking system to support the interest rate policy, that may actually be changing in the future. For further reference see the link in my previous post.

I think I am the only shrink qualified person reading this blog, and I'm going to tell you the following story.Last week I held up a10€ note in front of one of my friends (by the way, anonymous, I trust the German director of 2012 to know that the € is currently worth a great deal more than the $, which has its advantages for... investment, but NOT for export, as we all know).I asked her what it was WORTH.And she said... essentially that it was worth... the cost of the paper it was printed on.It is important to keep this in mind at all times.Many people (like Alexander Pope, a long time ago...) instinctively feel that fiat money is worthless, that it is a scam.And these psychological reactions are very important to our "problem".When you start thinking about fiat money, you realize the breathtaking abstraction involved in it.What's so bad about that ? After all, that 10€ note is worth... just what the person on the other end receiving it is willing to give up in exchange for it. (And we hope that he still has enough trust to want to exchange it...)That fiat note is every bit as... abstract as the words that we are exchanging on this blog.Why not ?The problem lies in the fact that... for a long time we have imagined that the note was referenced on something else, something... tangible, something absolute like.. gold.And this realization is STILL in people's minds.But... there is no reason for us to accept this...limitation. Accepting this limitation is nothing but... CONSENSUAL, after all...

Nice, Edwardo.You are discovering a writer's vocation, right ?So... why not come over to the Saloon, and.. indulge yourself a little ? ;-)Although now that I think about it, you are probably already writing somewhere out there in blogoland. BUT... are your writing SUMPTUOUS prose, Edwardo ?That's the kind we want to sink our teeth into...

H & Camabron,The Treasury spends by creating new reserve balances, there is no "debt" created per se. The Govt payments themselves create the reserve balances that are in turn available to buy the Treasury Securities; the govt is never revenue constrained. There is no chance of insolvency with a sovereign/monopoly issuer of it's own currency.In fact I have heard that Treasury is studying the elimination of Treasury securities and is going to use this years operations as proof that govt need not issue. They (Treasury and Fed) are on track to buy in as much govt debt as was issued this CY, a govt that buys in what it issues is like they never issued it in the first place. No net issuance this year and as far as I can tell, the only commodities that have increased in price over this time are chicken wings and gold, perhaps each bid up by the same sort of intellectual mentality.

@Debra,

As far as your paper money, it is more accurate to think of it technically as a "portable" form of a federal reserve balance. It is issued by the bank teller to you after your real reserve balance (bank account) is debited.

Matt, a fair amount of my paper money, as you call it, never transits by my bank account as my husband is in private practice, and it gets passed on to me to do our shopping with.So... the banker has NOTHING to do with it.Not all of us live in salaryland, Matt.And your other comment about government solvency is negated by the fact that most people rather naturally (albeit falsely, I agree with you...) assume that if government borrows money it has to pay it back the way that you and I do, and that government has to balance its budget/bank account just the way individuals do.Those are tedious and faulty assumptions, but they are a big part of popular ignorance, and WHAT PEOPLE THINK is a big big factor in the way they behave, and how our little problem is going to be solved.

I too always look for such contrary signs. By the time the non-financial media makes mention of a trend it's in it's final stages and it's days are numbered. There's a TV show called "criminal minds" and in it one of the characters was checking up on his investment in gold which confirms your observation about the dollar.

But beware because although it's likely that the trend's days are numbered it's often the case that you see a blow-off move when you see these media signals and that's exactly what were are seeing with gold and that's also what happened with equities to the downside when the stock market was often mentioned in TV dramas like CSI and House early this year.

Well, i've seen the movie back in the early summer of 2010! I deliberately decided to see the movie in order to find out whether it had to do or not with the current financial situation.Given the fact that having insider information for dids of highranking officials in deutsch multinational firm i was curious to see if there were any correlations.The movie was stunning in front of my eyes i ve been watsching a great part of the financial scenario these officials have been preparing since the midst of 2009!!Fistly the financial damage of the 2008 was so huge that the whole system almost came to total disaster at once. Later on they aknowledged that there is simply nothing to be done in order to fix in the long term the situation and the only thing they could do is to gain time and at the same time getting prepared for the next day.G20, G8 are fully aware that the financial collapse is imminent and it is just a matter of time to blow in a full scale crisis. The images from the movie of the tsunami from Japan sinking like a nutshell the luxurious vessel was also symbolic. The Japanese economy is at stake, their sovereign debt consumes more than 50% of their total revenues...a more appreciated yen, and a possible inflation that may erupt from the desperate and last arsenal that the FED had and used in order to stimulous the economy will do things even worse.The images of people shopping in super markets and at the same time the earth beneath their feet was crucking and vanishing tells us one thing. Everything is going to happen really fast that anyone who is not aware of the situation and does not take any precaution measures for him and his beloved ones has few chances to survive. The pheonomenon we are going to face in a few months or yrs is called hyperinflation. Hyperinflation will erupt suddenly, lifetime economies of paper money will become toilet papers,and the price of goods will get to astronomical heights. People will starvate, chaos and anarchy will prevail for some time and at the same time the system will be illiminating sovereign debt through hyperinflation and through the destruction of people savings. Thus it will be able for the system to make a restart in the global economy after a 2-3 yrs of such a global catastrophy.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.